Capital Market Assumptions
Description
In this project, we develop our own capital market assumptions which reflect our projections on long-term risk and returns of different asset classes including equity, fixed income, and alternative assets.
The outputs of the project could then be used by various types of end users such as portfolio managers and institutional investors to construct their portfolios, assess their portfolio risk-return profiles, and build simulation models that take into account different future market scenarios.
Key researchers
- Lai Hoang
- Ummul Ruthbah
- Trinh Le
Outputs
Long-term capital market assumptions – Public Equity
This paper presents Capital Market Assumptions (CMA) for public equities, which outline the expected returns, volatility, and correlation estimates of different equity markets in the next ten years. We consider two widely used approaches to forecasting real equity returns: cyclically adjusted price-to-earnings ratio (CAPE) and building blocks. We rely on backtesting to select the best model for each market. We also consider the effects of inflation and foreign exchange rate changes to reflect the real returns to investors and the increasing trend of cross-border investments.
Long-term capital market assumptions – Fixed Income
Lai Hoang and Ummul Ruthbah developed Capital Market Assumptions (CMA) for fixed income, outlining the expected returns, volatility, and correlation estimates of different fixed-income asset classes in various countries/regions. We adopt a “building block” approach to estimate fixed income returns, wherein individual underlying components are forecasted and aggregated to form the return estimates. The effects of inflation and foreign exchange rate changes are finally considered to account for nominal price changes and cross-border investment.
Long-term capital market assumptions – Unlisted Assets
In this paper Trinh Le and Ummul Ruthbah develop our Capital Market Assumptions (CMA) for unlisted assets, outlining expected returns, volatility, and correlation estimates for various asset classes, including private equity, infrastructure, and real estate. We apply a customized approach to estimate returns, considering unique factors such as illiquidity premiums, and valuation uncertainties. Additionally, we factor in inflation and exchange rate fluctuations to ensure our estimates reflect nominal price changes and the growing importance of international exposure in unlisted asset portfolios.
Comfort or Collapse: Why Balance Size and Design, Not Just Returns, Decide Retirement
A new Monte Carlo analysis by the Monash Centre for Financial Studies highlights the fragility of retirement outcomes for Australians entering 2025. The study, using the Capital Market Assumptions developed by the Centre, shows that the sustainability of retirement income rests on three factors: the size of the starting balance, the mix of equities and bonds, and the sequence of market returns in the first years of retirement. The findings are sobering. Retirees with less than A$250,000 face a high likelihood of exhausting their superannuation within a decade if they target a comfortable lifestyle. At balances above about A$400,000, the chance of sustaining income rises to near certainty, regardless of portfolio design.
Can Diversified Portfolios Deliver? Evidence from MCFS Capital Market Assumptions
In an environment where interest rates and cash yields are elevated, Australian investors face increasingly complex decisions about how to allocate assets, especially between equities and fixed income. Using Monte Carlo simulations over a 10-year horizon, we assess a spectrum of diversified portfolios – from fully defensive (100% fixed income) to fully growth-oriented (100% equity) – against six key investment criteria: risk-adjusted performance, downside risk, maximum drawdown, inflation protection, performance relative to cash, and the probability of meeting target return objectives. Our results suggest that the optimal asset allocation depends on the investor’s objective, with different portfolios offering distinct trade-offs between risk, return, and resilience.